This review looks at the Wigton Windfarm (WWF) Limited’s Initial Public Offering (IPO) prospectus. It uses mainly information provided in the prospectus but references fiscal rules contained in the Financial Administration and Audit (FAA) and Public Bodies Management and Accountability (PBMA) acts and the Estimates of Revenue and Expenditure for Public Bodies.
The objective is to represent the information in a manner that points out the key information to consider when determining whether or not to invest. Investors are invited to extract whatever value they can and act according to their own understanding, focusing on those facts highlighted in the piece that would either motivate them to invest or not invest.
ON THE FACE OF IT: WHAT IS GOOD ABOUT THE IPO
The Wigton Windfarm IPO is admirable, if only for the following reasons:
Social equity considerations appeal to public sector workers (PSWs): The inclusion of 2.2 billion reserved shares, valued at $1.1 billion at $0.50 per share, for PSWs means that, of the 11 billion shares, valued at $5.5 billion, PSWs have right of first refusal to 20 per cent or one of every five shares that were offered up for sale.
With respect to political economy, this is an important policy stance taken by the current Administration to not only ensure that PSWs are saving and investing in the country but also, inherently and tacitly, to underscore the importance of PSWs in the social partnership/ social consensus on the direction in which the country is heading and, as the prime minister calls it, the socialisation, not socialism, of wealth.
Social Equity Considerations Limit on Share Ownership for Five Years: The limitation or ceiling of no more than 10 per cent of all shares being held by any one investor, even with the facility for transfer of shares during the first five years after close of the offer for sale (pp. 10, 15, 154 (15.37), 156 (15.43)) ensures that no one shareholder has a majority ownership in the company.
Social Equity Considerations Broad-Based Ownership: Allocations are on a bottom-up basis and NOT on a first come, first served basis (p. 12) in order to achieve a greater level of social equity and diversity in the pool of investors. In fact, “PCJ reserves the right to modify its allocation plan to meet its objective of wide ownership of the company” (p. 16). Additionally, the bottom up approach will ensure that those that seek to buy a lower number of shares will benefit first as opposed to those who want higher volumes first. Up to the first 10,000 shares’ subscription will be met. The reasons proffered (p. 14) are laudable for the most part — that is: (a) widen the ownership base of the company; (b) allow direct equity participation in the economy by encouraging local ownership and participation in the energy sector; and (c) provide funds to PCJ.
Importantly, the accountant general will hold one Special Share, valued at $1, as the accountant general is a shareholder in all public corporations, representing the Government.
Full Disclosure: The disclosure re debt/liabilities — both past and present — is important in understanding the full financial picture of WWF Limited. The disclosure on pages 33 – 39 of the prospectus (9), including a debt to the National Commercial Bank which has been cleared and just requires that letter of set off to be registered at the Companies Office of Jamaica, as well as the detailed descriptions of the contracts entered into (pp. 146 – 149 (15.10) allow the investor to understand the level of indebtedness as well as the extent to which the company’s physical assets — both present and future — are being used as security for recent bond placements.
Capital Raising Considerations: The use of the JSE to raise capital is a good move, as opposed to the international capital market, given the foreign exchange risk faced by the company over the last five years due to fluctuations in the exchange rate. Given that Jamaica has a flexible or floating exchange rate, the use of the JSE to sell shares denominated in J$ is one risk mitigation measure as the profitability of the company over the last five-year period could have been better were it not for foreign exchange losses (pp. 49 – 50).
What Could Be Better About the Prospectus
Use of Proceeds of Offer of sale
While the prospectus provides much information, there is a level of ambiguity with regards to the use of the proceeds of the offer of sale after expenses have been deducted. Yes, the Petroleum Corporation of Jamaica (PCJ) is the parent company but what will the PCJ and the Ministry of Finance and Public Service be doing with these funds, other than possibly paying down existing liabilities of WWF Limited?
The following information is provided:
“PCJ intends to use part of the offer for sale proceeds to pay the offer for sale & listing expenses. PCJ and the Ministry of Finance and the Public Service will decide on how the balance is to be utilised” (p. 18 and p. 144 (15.2)).
Investors may want to know more as opposed to leaving it to the prerogative of the two entities, given that wider ownership is being sought and smaller investors may want to be appeased that it is being put to the best use possible. This is also a question that potential investors have voiced openly: why is the use of the rest of the $5.11 billion, after offer of sale and listing expenses are deducted, so vague/ non-specific?
References to the PetroCaribe Development Fund (PCDF)
There was mention of the previous indebtedness to the PetroCaribe Development Fund (PCDF) which had provided two concessionary loans to WWF Limited. The following statement should have been updated: “This means that if this offer for sale is successful the company would cease to be a public body and would not qualify to hold loans from PetroCaribe Fund” (p. 20). The PCDF has been wound up as at March 31, 2019, and this was also advised by the Hon Minister of Finance and highlighted in the Gleaner editorial dated April 1, 2019. As such, neither WWF Limited nor any other public body — commercial status or not — will qualify to hold loans from PCDF. This same oversight/error is reflected on pages 36 and 46 (9.11 & 11.4). Additional details on the loans from PCDF can be found on pages 35 – 36 (9.8 to 9.10 of the Prospectus).
FISCAL RULES AND WWF LIMITED’S IPO
Most investors do not think about Jamaica’s fiscal rules and how the Wigton IPO aligns with those rules. It is important to understand that an entity that is certified as commercial has to meet certain performance criteria, which are established in laws and regulations.
From the perspective of the fiscal rules, established in the FAA Act and the PBMA Act, it is important to establish that the fiscal rules made provisions for self-financing public bodies that were certified by the auditor general as meeting the criteria for commercial status, to be excluded from the fiscal rules. This is stated explicitly in Regulation 14 of the FAA (FRF) Regulations – Certification of public bodies as not part of the public sector – which states:
14. – (1) For the purposes of Part VII of the Act, the auditor general shall, in accordance with this regulation, certify that a public body primarily carries out functions that are of a commercial nature if the auditor general is satisfied that the public body meets the criteria that are set out in the schedule.
(2) The minister shall, no later than August 31 in the year 2016, and no later than August 31 in every third year thereafter, provide the auditor general with a list of public bodies that the minister wishes the auditor general to consider for certification under paragraph (1), together with the audited financial statements and annual reports of those public bodies for the three financial years preceding the year in which the list is provided.
(3) Upon receiving a list and the financial statements and annual reports under paragraph (2), the auditor general shall:
(a) no later than September 30 in the year in which the list is received, make a decision on whether or not to certify any of the listed public bodies under paragraph (1); and
(b) notify the minister of that decision.
(4) Certification of a public body as not being part of the specified public sector shall take effect on April 1 of the year following the date of the auditor general’s decision under paragraph (3) to certify the public body.
(5) At the time of a recalibration under section 48CA(2) to (4) of the Act, or upon receiving a request from the minister under paragraph (6), the auditor general shall, in accordance with paragraph (1), determine:
(a) whether a public body that is not part of the specified public sector continues to meet the criteria set out in the schedule, and if the auditor general is satisfied that it does not do so, the auditor general shall withdraw the certification of that public body; and
(b) whether a public body that is within the specified public sector meets the criteria set out in the schedule, and, if the auditor general is satisfied that the public body meets the criteria, the auditor general shall certify that the specified public body primarily carries out functions that are of a commercial nature.
(6) The minister may request the auditor general to make a determination under paragraph (5) and take the action required under that paragraph following such determination, if at any time between recalibrations the minister considers that:
(a) a public body that is not part of the specified public sector does not meet the criteria set out in the schedule; or
(b) a public body that is within the specified public sector meets the criteria set out in the schedule.”.
There is a four-pronged criteria based on: Fiscal Independence; Independence of Human Resource Decision-Making; Financial Standards; and Transparency and Governance.
With regard to the fiscal rules, page iv of the prospectus has, potentially, the most important information which potential shareholders and, even more so, taxpayers should be keen on.
“At the close of business on March 31, 2019 the company’s financial indebtedness to banks, financial institutions and other lenders was for an aggregate sum of J$6,371,624,291.59. The company has not issued any guarantees or assumed any contingent liability.”
Wigton Wind Farm is compliant with the fiscal rules as a commercial entity transitioning from the specified public sector to operate outside of the fiscal rules. 3.3 of the Schedule to Regulation 14.1 of the FAA (Fiscal Responsibility Framework) Regulations requires that the Government has no outstanding financial guarantees in respect of the public body.
Part of the rationale for these provisions in the fiscal rules was to remove the burden of guarantees brought on by public enterprises. The thinking is that companies should be going concerns (or profitable) if they are to become commercial entities, consistent with the law. The choke hold on the public purse (whether real – guarantees) or probable (contingent liabilities) had to be permanently arrested. For Wigton Windfarm to be put forward for commercialisation/ privatisation, it had to have met all four criteria. The test of financial standards requires that at least one of the following provisions apply in respect of the public body:
* the average long-term debt to equity ratio of the public body (on a stand-alone basis or, if applicable, on a consolidated basis) over the three preceding financial years is no more than 2.5, where long-term debt means debt that is due over a period that is longer than one year;
* the positive working capital and current ratio of the public body (on a stand-alone basis or, if applicable, on a consolidated basis) is at least 1.2, where current ratio means current assets divided by current liabilities.
Summary of Key Financial Indicators
It is worth noting that the FAA (FRF) Regulations is a stringent set of standards, especially with regard to Financial Standards. Note as well that the Regulations allow for these key financial indicators to be calculated either on a stand-alone or consolidated basis.
The Audited Statement of Comprehensive Income shows that WWF Limited has had a positive average annual net profit after tax of $438.2 million over the last three years (page 9). The Schedule to Regulation 14(1) of the FAA (FRF) Regulations requires that “the public body has, on average over the three preceding financial years, recorded a positive net profit after tax, on a stand-alone basis or, if applicable on a consolidated basis”. WWF Limited achieves the positive average annual net profit after tax criteria on a stand-alone basis, without reference to its parent company PCJ (consolidated basis).
Based on data provided in the prospectus, the long-term debt (debt over 12 months) to equity ratio has been, on average 6.9 over the last three fiscal years (p. 65), with a low of 3.75 in the last fiscal year. While this figure is higher than the ceiling of 2.5 established in the fiscal rules, the literature suggests that higher long-term debt to equity ratios are more acceptable for utility companies which have more stable income streams and can, therefore, take on more risk/leverage to finance certain development objectives. Leverage refers to the extent to which the company is indebted (principal and interest repayments).
The parent company, PCJ, has maintained a long-term debt to equity ratio of 0.3, on average, over the last three years. Notwithstanding, on a consolidated basis, WWF does not meet the current ratio of a minimum of 1.2 on either a stand-alone basis or a consolidated basis.
Positive working capital using the current ratio (current assets over current liabilities) does not satisfy the lower threshold for working capital sufficiency of 1.2 (p. 65) on a stand-alone basis. While the five-year average was 1.2, the three-year average was 1.0. However, as PCJ’s current ratio has been 20.5, on average, over the last three years, WWF meets the current ratio of a minimum of 1.2 on a consolidated basis.
The fiscal rules require that EITHER 5.4a (long-term debt to equity ratio) OR 5.4b (positive working capital of 1.2 or higher) be met. Criteria 5.4a of the Schedule to Regulation 14(1) of the FAA (FRF) Regulations is unmet, but criteria 5.4b is met on a consolidated basis, using the Estimates of Revenue and Expenditure for financial year ended March 31, 2020 for the PCJ which includes audited financial statements up to FY 2017/18.
The current move to privatise WWF Limited is suggestive of a number of linked factors that all investors should be aware of and consider in determining whether to invest and the level of investment to make.
The massive investment in the WWF is consistent with Jamaica’s Energy Policy, the Electricity Act of 2015 and the move towards greater use of renewables to reduce our oil import bill.
The Office of Utilities Regulation (OUR) has, over time, invited bids for additional generating capacity. The WWF’s six per cent share of aggregate generating capacity of all providers, including JPS (page 9), suggests that there is room for growth. The proposed Phase IV expansion (p. 54) also augurs well for increasing WWF’s generating capacity. There is also the Munro Wind Farm in St Elizabeth which is currently non-operational (p. 42) which could be a possible consideration for acquisition.
The listing of the WWF on the Jamaica Stock Exchange (JSE) is just one step nationally but has implications for regional expansion.
There is mention of the intent to, similarly list the Jamaica Public Service (JPS), on the JSE suggests that the Energy Policy of the Government is being advanced in a strategic way, both incrementally and also in parallel. Note that the JPS’s capacity for liquefied natural gas has been augmented. The energy landscape of the country is being transformed in a pivotal way.
Lastly, what of Petrojam? We are aware that the Refinery Upgrade Project — which could have seen Petrojam listed on the JSE to raise the necessary capital, given the legislative requirements (fiscal rules) that there be no guarantees or contingent liabilities — has basically been interred without the possibility of resurrection. Given the WWF development and the indications for JPS privatisation, what is the logical position — policy and otherwise — to take with regard to Petrojam to achieve policy coherence with respect to the energy policy?
Putting all of the above together, are you, the investor, of the view that whether through design or accident, the commercialisation of WWF is a game-changer and one to support, even initially, as you watch the market trends and any other risk factors which the prospectus so kindly outlines (nice euphemism for disclaimer)?
An example is on page 4 (2.6): “This prospectus contains forward-looking statements. Specifically, forward-looking statements are found in Section 10. Forward-looking statements are also found in other sections throughout the document and may be identified by accompanying language such as “expects”, “intends”, “anticipates”, “estimates” and other cognate or analogous expressions or by qualifying language or assumptions. These statements involve both known and unknown risks, uncertainties and other important factors that could cause the actual results or outcome to differ materially from the forward-looking statements”.
The risks, uncertainties and other factors are summarised in 2.7, 2.8, 2.9 (pp. 4 – 5) and expanded in 8 (pp. 22 – 32) include those that can be addressed by engaging the political electorate, especially when there are impending elections. These factors, implicitly, suggest that policy consistency across administrations or even when there is a change in administration, can affect the price of the stock, once it is listed on the JSE. As voters and shareholders, we can put our politicians, aspirants or incumbents, to speak to how they will treat with these matters in the future.
2.7 of the prospectus outlines risks and uncertainty that can be induced by the political climate of the country.
(c) changes in political, social and economic conditions impacting adversely on the securities market in general and on the company in particular;
(d) regulatory initiatives adversely affecting the securities market or the company;
(e) changes in the electricity regulatory regime;
(i) changes in tax policy, the application of tax laws and the like and/or the Government’s regulatory regime.
2.8 of the prospectus (page 5) basically cautions prospective investors to temper their expectations within the parameters provided by the prospectus. The prospectus is a forward-looking statement, as at the date it was produced, and no more than that. Project the assumptions, risks, uncertainties onto your expectations and not vice versa. In other words, there are things that cannot be avoided, such as natural disasters, but there are other things that can be mitigated against.
Prospective investor, you can read on the lines but also read between the lines. Risk can be bad but risk can be good. Taking all relevant facts and assumptions into consideration, Wigton Wind Farm Limited appears to be a good risk in the short to medium term, at least. Keep glued to the audited financial statements (included in this prospectus) and other factors that can impact on its performance to know whether to hold or fold. The best advice to give is that prospective investors need to read, in particular, pages 22 – 32 very thoroughly as well as the Dividend Policy.
The Dividend Policy might create some uncertainty, given that there is a caveat: “The company’s dividend policy is subject to the availability of sufficient distributable reserves for each financial year. The company reserves the right to revise its dividend policy as the need arises” (p. 11 and p. 61 (13)). This means that the maximum dividend payout is 25 per cent of net profits after tax or, simply put, for every share that is held by an investor, there is the potential to get 25 per cent of whatever the net profit after tax is, divided by the 11 billion shares.
If things are not going well, the company can adjust its dividend policy as it cannot pay out dividends and then not have operating capital (revenue sufficiency for continuity of operations).
Again, temper expectations and monitor developments. Life is uncertain. The more information you have, the better able you are to navigate and make the choices that are right for you.